Leegin Creative Leather Products, Inc. v. PSKS, Inc. (dba Kay's Kloset) (06/28/2007)

Question presented: Whether vertical minimum resale price policies are to be judged by a "per se" or "rule of reason" analysis under the Sherman Act's Section 1?

BY GIANG NGUYEN, MEDILL NEWS SERVICE

From the technophile who likes to discuss the pros and cons with a knowledgeable sales representative before buying that new HDTV, to the casual shopper who buys fashion accessories at stores with trendy ambience, the U.S. Supreme Court's decision to review retail pricing policies in Leegin v. PKSK case may affect buying habits.

Leegin Creative Leather Products, a small California manufacturer of women's fashion accessories, wanted to appeal to customers who value extra service and appreciate a pleasant product display. Even if it meant slightly higher prices.

So in 1997, Leegin instituted a pricing policy that required its retailers to adhere to a minimum price, in particular for its Brighton line of products.

This minimum retail price helped Leegin compete against other larger brands of women's accessories, Leegin's counsel at Gibson, Dunn & Crutcher said.

However, one of Leegin's clients, PSKS, which operates out of Texas under the name of Kay's Kloset, refused to follow the policies and regularly priced Brighton products below the minimum price set by Leegin.

Leegin countered by suspending all shipments of its Brighton products to PSKS in 2002. The Brighton products were quite successful at PSKS and the retailer subsequently saw losses in its bottom line.

PSKS sued Leegin claiming that the manufacturer entered into illegal agreements with retailers to fix prices and sought future-lost-profits damages. The jury in the U.S. District Court for the Eastern District of Texas found that PSKS indeed suffered antitrust injury and awarded PSKS treble damages of $3.6 million.

In its decision, the district court affirmed a 95-year-old landmark ruling in Dr. Miles Medical Co. vs. John D. Park & Sons Co. that in effect said all retail price-fixing agreements are illegal.

Such agreements, known as "vertical price maintenance" because they exist between manufacturers and retailers, are per se, or inherently, illegal, the lower court said.

Under the per se analysis, a company that sets minimum prices automatically violates the antitrust law under the Sherman Antitrust Act.

The per se application of the rule in Dr. Miles stands in contrast to the "rule of reason," standard which would allow each case to be considered individually to determine whether the price-fixing agreeement is in fact anti-competitive.

Leegin appealed to the 5th Circuit Court of Appeals but the appellate court denied Leegin's request for a rule-of-reason treatment and affirmed the lower court's decision.

In its opinion, the appeals court disagreed with Leegin's assertion that the per se rule had not been consistently applied since the 1911 Dr. Miles ruling, while in cases where the rule of reason had been applied, the circumstances did not involve vertical minimum price-fixing.

On Dec. 7, 2006, the U.S. Supreme Court accepted review in the case, and allowed the following to file amicus briefs in the case: CTIA -The Wireless Association, the National Association of Manufacturers, and a group of economists.

"This pricing policy allows Leegin and others to build a strong brand name. All retailers are selling the same product at the same price, [Leegin] competes by providing additional services that would help Leegin stand out from consumers," Leegin's counsel said. "It provides a consumer-additional choice."

"In recent years, the Supreme Court has consistently moved into a direction of economic rationality. In my view, if the Supreme Court continues with that trend, then the per se rule should not apply," said Joseph Angland, chair of the American Bar Associations's section of anti-trust law, who filed the amicus brief on behalf of 24 economists. "The per se rule is not rooted in coherent economic analysis."

In filing the brief, the group urged the Supreme Court to replace the blanket prohibition under the per se rule with a more "intelligent" approach by rule of reason.

Angland added that a resale price maintenance can, in fact, enhance competition in instances where new products are introduced to the market that require the retailer's sales efforts to help consumers understand the virtue of the product.

So, a resale minimum price will allow the electronics store to use the increased profit margin to train its sales staff on the characteristics of the new HDTV. But if shoppers can just take the good advice from the store reps and then go home to find the same product on the Internet at a cheaper price, it will create a "free-rider problem" that hurts the brick and mortar store, Angland said.

Attorneys for Leegin supported that assertion, given its position as a small player in a crowded accessories market. It would make it increasingly difficult for small retailers and manufacturers to compete with large discounters, such as Wal-Mart, the counsel said.

But Robert Coykendall, an attorney for PSKS argued that the Miles decision has lowered prices for consumers and helped the economy expand many times over during the last century.

"If the Supreme Court were to change [the standing ruling], consumer-good prices nearly across the board would increase," he said, "especially brand-name goods." He referred to the amicus brief filed by CITA - The Wireless Assocation and said that this might be an indication that cell phones prices could also increase.

"I would expect that many of those companies would move to a contractual price fixing if Dr. Miles is repealed. It removes any incentive [for retailers] to ever put their products on sale," he said.

For consumers of the latest electronic gadgets or the new handbag, the Leegin case boils down to the question of where to shop: A price-conscious discounter like Walmart or a store with a knowledgeable staff or pleasant environment like Best Buy or Nordstrom?

On June 28, 2007, a divided Court shook up the business community and overruled the 1911 Dr. Miles decision.

“Vertical agreements establishing minimum resale prices can have either pro-competitive or anticompetitive effects, depending upon the circumstances in which they are formed,” Justice Anthony Kennedy wrote for a 5-4 majority.

The majority based its decision on anti-trust authorities and modern economic theory, noting that the old per se rule was of “slight relevance” in today's world.

Writing for the dissent, Justice Stephen Breyer suggested, however, that the economic arguments were not persuasive enough to support overruling such a “well-established a legal precedent.”

“The only safe predictions to make about today’s decision are that it will likely raise the price of goods at retail and that it will create considerable legal turbulence as lower courts seek to develop workable principles.”

The case drew mixed reactions about the extent of the opinion’s impact.

Consumer Electronics Association President Gary Shapiro praised the decision, noting that the Court’s “holding that the ‘rule of reason’ should apply to the legality of manufacturer pricing decisions, means simply that all the facts will be examined before a finding of illegality - replacing a black and white rule of illegality in every case.”

Mallory Duncan, general counsel of the National Retail Federation, warned that the Court’s ruling “puts a slight thumb on the scale for those manufacturers who may want to set minimum prices.”